GBP/USD, EUR/USD Outlook: Two Trades to Watch

GBP/USD rises to a 15-month high as UK wages rise to a record high

UK wages rise 7.3% 3Mo/Yr May vs 7.1% forecast
US Fed speakers suggest peak rates is close
GBP/USD rises above 1.29 to a 15-month high

GBP/USD is trading at a fresh year-to-date high amid a weaker USD and after UK wage data continues to climb.

The latest UK jobs data showed that average earnings held at 7.3% 3Mo/Yr May defying expectations of a fall to 7.1%. April’s print was revised higher from 7.2% to 7.3%

Wage growth and inflation figures are the two key data points that the BoE will focus on before the MPC meeting in early August. BoE’s Andrew Bailey has already warned that the UK is in a wage-price spiral, and this data only fuels those concerns further.

Unemployment unexpectedly ticked higher to 4% from 3.8%, a sign that the tightness in the labour market might be starting to ease.

However, as BoE’s Andrew Bailey pointed out yesterday in a speech, this level of wage growth is considered to be a level that is making inflation stickier than expected. This will cause concern for BoE policymakers as inflation is still over 4 times the BoE’s 2% target.

UK inflation data is due on the 19^th of July.

The market has almost fully priced in a 50 basis point rate hike in August, taking rates to 5.5% and then a further increase to 6.5% by early next year.

In contrast, the USD is falling on bets that the Federal Reserve could soon conclude its rate hiking cycle. Comments from several Fed officials yesterday indicated that the Fed would hike rates again in July but could struggle to keep raising interest rates. These comments, combined with the weaker headline NFP number, are fueling bets that the peak rates could be near.

The US economic calendar is quiet today. St Louis Fed President James Bullard is due to speak.

GBP/USD outlook – technical analysis

GBP/USD has pushed above resistance at 1.2850, the June high, climbing above 1.29 to a 15-month high. The RSI is exhibiting bearish divergence, which could suggest that the rally is running out of steam.

Buyers will now aim for 1.30, the psychological level ahead of 1.3170, the April 2022 high.

On the downside, support can be seen at 1.2750, the 20 sma, ahead of 1.2680, the May high.

EUR/USD rises above 1.10 ahead of German ZEW economic sentiment

German ZEW economic sentiment to deteriorate to -10.5 from -8.5
Sentix investor sentiment fell to -22.9 from -17
EUR/USD rises above 1.10 to a 2-month high

EUR/USD is rising for a third straight day, pushing above 1.10 to a monthly high on USD weakness and ahead of German ZEW economic sentiment data.

German ZEW economic sentiment is expected to deteriorate in July to -10.5 from -8.5, and the eurozone ZEW, economic sentiment index, is set to fall from -10 to -17.

Data comes after Sentix investor sentiment fell by more than expected yesterday to -22.9 from -17, falling for a third straight month, hitting an 8-month low.

Weak investor and economic sentiment raise concerns about a prolonged recession in the region.

German inflation data confirmed that CPI rose in June to 6.4% YoY, up from 6.1% in May. The market is almost fully pricing in a 25 bps rate hike by the ECB in July and looks to another 25 bps hike before October.

ECB governing council member Francois Villeroy de Galhau said that the ECB is close to peak rates and noted that they are starting to see good news on inflation.

Looking ahead, the US economic calendar is quiet. Attention will be on St Louis Fed President James Bullard, who is due to speak. His comments come after comments from Fed speakers yesterday, which suggested that peak rates are near and ahead of tomorrow’s crucial CPI data.

EUR/USD outlook – technical analysis

EUR/USD found support from the 100 sma and rebounded higher, breaking out above the falling trendline dating back to early May, pushing above 1.10. The RSI supports further upside while it remains out of overbought territory.

Buyers could look for a rise above 1.1030, the February high, to extend gains towards 1.1095, the 2023 high.

Immediate support can be seen at 1.0975, the falling trendline support, ahead of 1.0925, the 20 sma. It would take a move below 1.0850 the 100 sma for bears to take control.

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